Meet Lim. Lim is 35 years old, with an annual income of RM80,000. He has a wife, a RM350,000 mortgage, a RM50,000 outstanding car loan, EPF, and RM50,000 in liquid assets comprising fixed deposits, stocks, and unit trusts.
How should Lim react if he were to inherit RM1 million today? Should he spend it? Invest it? Donate it? Some or all of the above?
To be sure, Lim would face big challenges with such a windfall. What would he need to manage this successfully? Here are five considerations.
1. Mindset
This refers to one’s mental capacity to handle money. It is one thing to have RM1 million; it is another to have the mindset for managing such a sum.
Would Lim see himself as instantaneously rich, or as a RM80,000-a year earner who just happened to inherit RM1 million?
Managing RM1 million with a RM80,000 mindset can be limiting. Lim would have to quickly appreciate that he needs newfound financial maturity. This must be paired with humility, so he can avoid rash decisions leading to irreparable losses.
Capital preservation is half the battle in handling huge sums of money.
2. Skills and experiences
This refers to one’s ability to manage a sizable investment portfolio. Lim’s inheritiance would lead him to countless investment options, including real estate, stocks, unit trusts, ETFs, equity and debt crowdfunding opportunities, futures and options, gold, bonds, and cryptocurrency.
Such an abundance of opportunities can either be a blessing or totally overwhelming. Lim would likely lack a game plan, as well as the skills and experience needed to manage a seven-figure portfolio as his investments were previously only worth RM50,000.
He would not be much worse off if he decided not to invest the RM1 million over the next two to three years. Inflation might take a bite but, if he lacks big-investment skills, he would be able to avoid making aimless decisions.
Instead, Lim would be better off gaining experience and developing his skills as an investor. This could involve learning about accounting, portfolio management, asset valuation, corporate and tax laws, and networking.
He could also test out his strategies and gain experience by using less than 5% of his newfound capital on preferred investments.
3. Family and friends
This includes Lim’s nuclear and extended family, friends and acquaintances. RM1 million would definitely attract people – but will they be financial friends or foes?
What would his wife’s expectations be? Is she a spendthrift? Would Lim be pressured into wasteful spending? Would she want to invest? Would Lim be expected to be her financer?
How financially aligned are the couple? Do they make decisions together?
How about Lim’s siblings, in-laws, and other relatives? Who might come out of the woodwork? Would Lim allow himself to be pressured into investing into various family-and-friend schemes?
With a RM1 million inheritance, Lim would need to be intentional or risk being shortchanged or even abused. At the end of the day, it would be Lim’s duty to protect his capital from bad people and bad investments.
4. Character
Different people handle money differently. Some are compulsive, others conservative; some are active, while many are passive. People may be financially skilled or otherwise; generous or stingy; mission- or people-oriented.
In short, self-awareness is crucial in managing RM1 million. A compulsive Lim might be prone to profligate spending and aimless investments, and could end up being a victim of greed.
An overly conservative Lim could settle his debts and park the remaining RM600,000 into fixed deposits to earn interest. He could thus enjoy some financial peace while having a big buffer, but he would also forgo chances to maximise and optimise his financial wealth.
Ultimately what Lim would do depends on what he wants in life. If he’s unsure, he would need to hit “pause” and take time to find out.
5. Advisers
Advisers can be either helpful or detrimental to one’s financial health. Different advisers, however, may well be swayed by their own personal preferences or background.
Lim would do well to choose a licensed financial planner who could map out his finances and recommend actionable steps based on Lim’s own situation and circumstances. This would be the safest and most comprehensive approach.
And now you know what you could do if you were to inherit RM1 million!
This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of many articles on finance featured on KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore.